How Have Automation and Trade Affected the Taxable Share of Covered Earnings?

Abstract

Over the past few decades, U.S. income inequality has grown, with high earners experiencing disproportionate growth. This pattern has increased the top earners’ share of national income and reduced the share of earnings taxable by Social Security from 87.1 percent to 82.7 percent since 1994, weakening the program’s fiscal situation. Yet the drivers of earnings inequality, and thus the taxable share, are poorly understood. This paper combines data from several sources with administrative earnings records from the Social Security Administration to estimate the contribution of two factors to the declining taxable share between 1994 and 2015: industrial automation and trade with China. The effect of each factor on different sections of the earnings distribution is estimated through a series of instrumental variables quantile regressions. The resulting coefficients are used to construct a counterfactual 2015 earnings distribution, assuming the factors had remained constant at their 1994 levels.